Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

The other factor that would intuitively lead to higher liquidity ratios is the unattractiveness of short- and intermediate-term munis.

The two-year triple-A yielded 0.71% yesterday based on the Municipal Market Data yield curve, up five basis points from its lowest-ever yield earlier this month.

The five-year triple-A is also up just five basis points from its all-time low in April.

Aside from a paltry absolute yield, the unattractiveness of short-term munis is compounded by the ascension in Treasury rates this year.

The two-year triple-A yield is 67.9% of the two-year Treasury yield. The average ratio since the early 1980s is 78%, according to MMD.

Many short-term munis yield less than Treasuries even after taxes.

In his weekly report last week, Morgan Stanley Smith Barney muni strategist George Friedlander wrote that an investor would need to be in the nonexistent 40.5% federal tax bracket to break even on a five-year Treasury compared with a five-year triple-A muni.

Friedlander said investors can gain better value by moving out along the curve, but most of the money hitting muni funds is landing in short and intermediate funds.

So what are the funds doing with the cash? Are they hoarding it and waiting for a better opportunity?

"The managers I'm talking to are finding places to put money to work," said Lawrence Jones, a fund analyst at Morningstar. "The managers I'm talking to are still finding what they consider to be some pretty decent bargains."

Berry said he has been buying some of the variable-rate debt notes whose letter-of-credit providers were downgraded and therefore no longer available for purchase by money market funds.

Morningstar furnished The Bond Buyer with the most recently reported liquidity ratios for 570 muni funds.

First, a disclaimer: not all funds report at the same time. Most of the funds have reported most recently at the end of June, and some have not reported since the end of March.

Considering investors have entrusted more than $13 billion to muni funds since the beginning of July, the timing differences could be significant.

Further, Jones cautioned, funds can accrue or deploy cash quickly. Everything can change in six days, let alone six weeks.

That said, far from sitting on cash, most funds have actually shed cash in the last six months, the liquidity ratios show.

Of the 570 funds, 237 reported a higher liquidity ratio than six months earlier. Fifty reported no change, and 283 reported a lower liquidity ratio.

This comports with figures supplied by the Investment Company Institute. At the end of June, funds held $14.63 billion in cash and cash equivalents, or 3.7% of the industry's assets.

A month earlier, it was $15.47 billion, or 4%. That means that funds ended a month in which they accumulated nearly $4.7 billion in cash with less cash than they started with.

The most recent liquidity ratio is about the same as it was a year ago and at the beginning of the year, and below average for the industry's history, according to ICI data.

Jeff Tjornehoj, a fund analyst at Lipper, said he expects the dividends short and intermediate funds pay to shrink because they are forced either to buy lower-yielding instruments or accept minimal yields on cash.

"Everything that they're looking at that's within their risk tolerance doesn't have a spectacular yield attached to it," he said.

The average SEC yield on a muni fund in July was 2.39%, down from 2.51% in June, according to Lipper.

Chris Johns, who manages a $232 million Colorado state fund for the Aquila Group of Funds, said muni funds are spending their cash because clients gave it to them for a reason.

Many managers believe the tidal wave of cash hitting the industry is coming out of money market funds.

The 519-fund tax-free money market industry has shed $45.81 billion this year, according to the ICI - a figure conspicuously coincident with the flows into muni funds.

Money market funds invest in highly liquid securities that often mature in about seven days. They offer investors supreme safety and liquidity.

Today, they also offer almost no yield. The average tax-free money market fund yields 0.11%, according to iMoneyNet.

The bare-boned yield coupled with investors' growing risk appetite has coaxed money out of this industry and into short- and intermediate-term funds, said Christian Hviid, who directs asset allocation for $7 billion in client portfolios at Genworth Financial Asset Management.

"People are getting sort of fatigued by cash paying next to zero," he said.

If investors wanted their money to dawdle in cash, they would have left it in cash, Johns said. The whole reason investors are giving him their money and paying a higher expense ratio is they have grown impatient with the yields on cash and they want heftier returns.

In other words, by the time he gets it, the judgment about whether the money should be stored in cash has already been made.

"We can't be too clever about holding cash," he said. "You have shareholders that are looking for yield ... shareholders that are expecting to get a dividend check every month, and they don't want to hear how clever we are in terms of timing the market."

Notably, money market managers face the opposite side of that dynamic. A client who invests in a money fund has implicitly requested the money be left in cash.

Under Rule 2a-7, money market funds are permitted to hold securities with maturities up to 397 days, and maintain an average maturity of at most 90 days.

Few funds test these limits, though, for the same reason muni fund managers are not stockpiling cash: it is not what the investor handed over the money for.

"By definition, if they're invested in a money market fund, our view is they've already made that asset-allocation decision," said Chris Carter, who manages a $1.78 billion tax-free money fund for Ridgeworth Investments. "We're still carrying a high level of daily liquidity representative of a financial system that really isn't fully healed yet. ... That's what the goal of the product is."